The Day After Russia Attacks
What War in Ukraine Would Look Like—and How America Should Respond
The United States’ reliance on Middle Eastern oil and the carbon emissions produced by the surging demand for fossil fuels in Asia tend to dominate discussions about the role of energy in U.S. foreign policy. But in recent years, the energy relationship between the United States and Latin America has perhaps become more important than either of those issues, as the largest share of the United States’ international trade and investment in the energy sector has occurred within the Western Hemisphere.
The energy markets of the Americas are deeply integrated. Despite the shale boom, which led to a sharp increase in U.S. oil production and a drop in imports, the United States still relies on Latin America for more than 30 percent of the oil it buys from abroad. For governments in Colombia, Ecuador, Mexico, and Venezuela, meanwhile, oil exports to the United States provide a critical source of revenue. And Latin America is a growing importer of U.S. natural gas and the largest market for U.S.-made refined petroleum products, such as gasoline.
American oil companies and utilities are big investors in Argentina, Brazil, Mexico, and Venezuela, helping to develop the energy resources of all those countries. In Brazil, the United States’ direct investment in oil and gas extraction reached $2.4 billion in 2015; in Mexico, the figure was $420 million. Washington’s financing and technical cooperation programs have further helped the development of new energy resources in the region. U.S. institutions and funds back clean energy investments and provide regulatory and technical guidance to tap the region’s shale fields.
The presidency of Donald Trump appears set to threaten this interdependence. Trump has vowed to curtail U.S. overseas investment in order to bring jobs back to the country, slap tariffs on imports, roll back energy sector regulations, and renege on Washington’s international climate change commitments. The president’s specific plans in these areas remain hazy, and the U.S. Congress, local courts, businesses, and perhaps some members of the new administration might oppose them should they materialize. But if Washington ends up damaging the deep ties that connect the United States' and Latin America's energy markets, both will be worse off.
In his first week in office, Trump floated a 20 percent import tax on Mexican goods as a way to pay for the construction of a wall on the United States’ southern border. Such a tax could prompt Mexico to impose retaliatory tariffs on U.S. exports, including refined petroleum products and natural gas. That is worrisome because Mexico is the second-largest recipient (after Canada) of U.S. energy exports, importing billions of dollars in gasoline and natural gas each year. What is more, crude oil is one of Mexico’s top exports to the United States, and a tariff on Mexican oil imports would encourage U.S. refiners to replace Mexican oil with more competitive crudes from elsewhere, pushing Mexico to further diversify its exports to Asian, European, and other Latin American countries.
Consider also the president’s campaign trail promises to renegotiate or withdraw from the North American Free Trade Agreement. If the Trump administration tries to renegotiate NAFTA, trade experts believe, it may seek to alter rules of origin, or the regulations that determine how NAFTA treats goods that incorporate components produced outside of Canada, Mexico, and the United States. It might also try to modify or eliminate the pact’s investment dispute settlement clauses and strengthen its intellectual property, environmental, and labor provisions. Those measures could increase the costs of bilateral trade and investment in the energy sector. Stricter rules of origin, for example, would limit companies’ ability to buy cheaper goods outside of North America while accessing NAFTA’s tax benefits. Eliminating investment dispute settlement provisions would increase the legal risks of overseas investment. And expanding workers’ ability to bargain in Mexico could boost labor costs.
Because NAFTA was signed at a time when Mexico still limited foreign firms’ participation in its oil sector, it exempted Mexico’s energy sector from the pact’s foreign investment provisions. If NAFTA’s three parties renegotiate the pact, the introduction of new energy-related provisions will almost certainly be on the table. Some of those provisions may be unfavorable to investors. And if the United States withdrew from NAFTA entirely, it would become harder to secure visas for U.S. workers, import U.S. equipment for oil projects in Mexico, and enforce agreements on standardizing environmental and safety regulations for energy projects. In response to the new U.S. administration’s rhetoric, Mexico has accelerated free trade talks with the European Union and is pursuing closer trade ties with Argentina and Brazil.
Trump’s executive order to advance the construction of the Keystone XL pipeline could further weaken the United States’ oil trade with Latin America. Although the pipeline’s immediate market impacts will be limited—low oil prices are making Canadian crude less competitive, a good deal of cross-border pipeline and rail infrastructure has already been built, and the U.S. oil market is currently oversupplied—the pipeline could have longer-term impacts on oil flows. As oil prices rise, Keystone would increase the competitiveness of Canadian crude exports to the United States, edging out other suppliers such as Mexico and Venezuela.
As Trump looks to incentivize companies to invest domestically, the United States’ investment overseas may shrink. Trump’s meetings with business leaders in the first few weeks of his presidency have already offered some clues as to what the energy sector should expect: the president has promised to cut regulations by 75 percent and to “massively” reduce corporate taxes; he has also threatened to impose a 35 percent tariff on some imported cars. Some automakers have already responded to these proposed changes. Ford said it would cancel its plans to build a factory in Mexico and expand a plant in Michigan, and Toyota announced that it would increase its investment in an Indiana plant.
Given today’s low oil prices and the cuts energy firms are making to their expenditures on fixed capital, reducing regulations and lowering corporate taxes could divert private energy investment from other countries with less competitive terms and redirect it to the United States. That would be bad news for countries such as Brazil, Mexico, Peru, and Uruguay, all of which plan to hold oil bid rounds this year and need foreign capital to develop their reserves. Firms that are already deeply invested in Latin American countries are unlikely to walk away, but new investors may hold off making new deals until Washington’s plans become clear—and that may take time.
Investors may hold off making new deals until Washington’s plans become clear—and that may take time.
Focusing on developing the United States’ domestic resources and reducing the country’s reliance on imports could chip away at Washington’s long history of promoting U.S. investment to develop resources overseas. The U.S. government, particularly the State Department, has historically pushed U.S. investment abroad, as it has through the Unconventional Gas Technical Engagement Program, which provides regulatory and technical guidance to foreign countries. Cooperation arranged through the initiative helped Argentina, for example, establish a regulatory framework as it awarded contracts to oil companies, including U.S. majors, to develop its massive shale reserves.
In his confirmation hearings, Secretary of State Rex Tillerson, a former ExxonMobil CEO, argued that the United States should focus on securing its energy supplies around the world rather than on reducing its reliance on foreign oil. That suggests Tillerson may seek to continue the State Department’s traditional role in promoting investment abroad. But even if he were to do so, how the rest of the new administration would receive his efforts remains to be seen.
The last area in which Trump may transform the United States’ energy relationship with Latin America is environmental policy. Former U.S. President Barack Obama strengthened the United States’ and Latin America’s cooperation on clean energy technology as part of his broader efforts to fight climate change. Between 2010 and 2014, the United States spent $2.5 billion helping other countries mitigate or adapt to global warming and its effects, and in 2014, Obama committed another $3 billion to the Green Climate Fund, which helps poor countries meet the climate challenge. Obama transferred two $500 million payments to the GCF while in office, drawing from State Department funds using executive power, which does not require congressional support.
The prospects for the United States paying out the remaining $2 billion look bleak: climate change policies and clean energy funding are among the primary targets of the massive federal budget cuts backed by the new administration and the Republican-led Congress. So far, the Trump White House has adhered closely to a blueprint for reduced government spending published by the Heritage Foundation, a conservative think tank, which calls for an end to the State Department’s funding for international climate change programs and the Department of Energy’s Office of Energy Efficiency and Renewable Energy, as well as its research on reducing carbon emissions. The Trump administration has not made those cuts yet, but in its first few weeks, it temporarily suspended all Environmental Protection Agency grants and ordered the EPA to remove its climate change data from its website (officials have since put those plans on hold). If Washington ends its international climate change support programs, Latin American countries would lose access to assistance that helps them lower their greenhouse gas emissions and adapt to a changing climate.
Trump’s government may also cut the Export-Import Bank’s and Overseas Private Investment Corporation’s lending to clean energy programs. During the Obama administration, loans from those institutions funded renewable energy and environmental protection projects around the world. The Trump administration, however, plans to have the Export-Import Bank and OPIC make loans based on projects’ commercial viability, without favoring clean energy sources, meaning that the recipients of the loans could include oil, gas, and coal projects, according to Michael McKenna, a lobbyist who led Trump’s energy team during the transition. That would reduce the incentives for U.S. companies to invest in renewable energy, especially in Central America and the Caribbean, which the Obama administration prioritized as recipients of U.S. aid.
Finally, cutting the United States’ international climate financing could undermine the commitments that Latin American states made under the Paris climate change agreement. Many Latin American countries’ emission reduction plans included conditional pledges, or further commitments that depend on the availability of technology transfers and international finance. Colombia, for example, promised to reduce its greenhouse gas emissions to 20 percent below its business-as-usual trajectory by 2030—or by 30 percent if other states support its efforts. Many other countries in the region, including Argentina, Bolivia, Mexico, and Peru, have made similar conditional pledges.
Latin American countries that have relied on the United States for foreign investment, access to markets, and state-led support in areas such as clean technology are deeply concerned by all these possibilities. Mexico clearly has the most at stake. Its economy is deeply intertwined with that of the United States, and the importance of access to U.S. capital and expertise in developing Mexico’s oil and power industries will grow under the country’s new energy investment framework. A weakening economy and setbacks to energy reform threaten President Enrique Peña Nieto’s agenda and his party’s chances of winning presidential elections next year (Mexico does not allow presidential reelection). The president’s approval ratings are already dismal—they sank to 12 percent in January, according to a Reforma poll—in part because of what most Mexicans view as his weak response to Trump’s attacks. The country's recent energy reforms are still opposed by roughly half of the population, as well as by Mexico’s leftist parties. Peña Nieto’s weaknesses should particularly benefit the leftist politician Andrés Manuel López Obrador, who could be a strong contender in the 2018 election and backs a deeper role for the state in the energy sector.
In other energy-rich Latin American countries, such as Argentina and Colombia, reduced trade, investment, and climate support from the United States could also have political consequences. Argentinian President Mauricio Macri is facing pushback on his market-oriented economic reforms, which have led to job cuts and higher electricity prices for consumers. To develop its vast shale oil and gas reserves, Argentina relies on investment and know-how from U.S. firms such Chevron and ExxonMobil, which have invested millions of dollars in those fields. Slowed progress in these areas would reduce revenue for local and national authorities and prolong Argentina’s reliance on imported natural gas.
Commercial relationships in the energy sector help provide the foundation for strong political ties.
In Colombia, President Juan Manuel Santos is struggling to rally public support and funding to implement the peace accord that his government signed with the FARC guerrilla group in November. A sharp decline in foreign direct investment in the oil sector, coupled with the drop in global oil prices, has already forced the central government to eliminate oil revenues—formerly a key source of income—from its 2017 budget. A further drop in revenue would squeeze the Santos government as it begins the accord’s implementation, which will require such costly measures as providing housing and job training for demobilized FARC combatants. Colombian government officials also told one of us that they worry the United States will renege on its promises of international aid, including those it has made under the Green Climate Fund.
Other countries, such as Brazil, where the energy industry and the economy as a whole are far less dependent on the United States than they are in Mexico and Colombia, will likely be less affected. In Venezuela, meanwhile, foreign investment in the oil sector has already plummeted thanks to the mismanagement of the government of President Nicolás Maduro, and Caracas receives very little funding from the United States.
In general, however, commercial relationships in the energy sector help provide the foundation for strong political ties between Latin America and the United States. Cuts to Washington’s energy engagement could undermine the connections that help support U.S.–Latin American cooperation on issues from security to immigration. When it comes to weakening energy integration in the Americas, there are few winners.